New Residential Construction Spending Continues Its Improvement

New residential construction spending was up a strong 2.3% on a seasonally adjusted (SA) basis after advancing 1.7% in April. Single-family construction spending increased 1.8% following a 1.2% rise in April. Multifamily construction spending surged 4.7% after jumping an almost as strong 4.1% in April, which was revised up from a more modest 1.2% increase. On a year-to-date basis, single-family and multifamily construction spending were up from last year, 10.9% and 12.4%, respectively.

Single-Family Housing
The Census Bureau’s report on June housing starts was a positive with a 6.9% (SA) increase in total housing starts. June single-family housing starts rose 4.7% to 539,000 at a seasonally adjusted annual rate (SAAR) from May’s 515,000. Single-family starts have been at or above 460,000 for the past eight months and above 500,000 for five of the last seven months. Meanwhile, June single-family building permits inched up 0.6% to 493,000, their highest level since March 2010. (See Alex Carrick’s commentary for more discussion on the June housing report.)

Another positive indicator for the single-family housing market comes from the July NAHB/Wells Fargo Housing Market Index (HMI), which jumped six points to 35, after edging up one point in June. The July HMI is its highest reading since March 2007. Increases in the HMI typically precede increases in housing starts by one to two months.

Multifamily Housing
June multifamily starts increased 12.8% to 221,000 (SAAR) and May’s starts number was revised up from 192,000 to 196,000. More instructive given multifamily starts’ volatility, June’s three-month moving average of 220,000 was down slightly — 0.6% from May. One troubling note was that June’s three-month moving average of multifamily building permits at 268,000 was down 4.9% from May. However, this was still the second highest reading since October 2008. We will be keeping an eye on both multifamily starts and permits to see if the recent pull back is only a temporary blip or an indication of slowing activity.

Outlook for Residential Construction
The housing market continues to face serious, though diminishing challenges. The number of foreclosures is on a downward trajectory. The number of delinquent mortgages is falling, indicating the inflow of new foreclosures is decreasing. More lenders now recognize the benefit of negotiating with a borrower either prior to default or in default, working out a reduction in principal or agreeing to a short sale rather than pursuing a foreclosure.

Meanwhile, single-family builders must compete with the downward price pressure from the sale of foreclosed properties and short sales in several markets. However, housing prices in many metro markets have stabilized and are even moving higher in a few markets. Banks and other lenders have been easing their lending standards a bit for builders and buyers, though hardly to the standards that analysts would characterize as normal (i.e., the type of standards that prevailed before the housing bubble). Overly conservative appraisals remain a significant hurdle to housing’s recovery.

Overall the outlook for multifamily construction spending remains positive. Continued low interest rates, falling vacancy rates, and rising rents underlie our forecast for multifamily construction. The forecast for single-family construction is for continued anemic recovery. The growing economy, continued hiring, low mortgage rates, and slightly easier mortgage lending standards are all positives for housing and residential construction.

At this point, employment growth is the most important factor that will drive the housing market. If the recent lackluster pace of hiring continues, the housing recovery will stall. Our forecast is based on the assumption that economic growth and employment will improve over the next several months.

The forecast is for new residential construction spending to increase 13.7% in 2012 and 11.8% in 2013. Note that these increases are from a low base. Based on demographics, multifamily construction activity is at least a third below the economy’s long-term needs and single-family construction less than half its desired level. Clearly, although improving, the nation is still far from a return to a fully normal housing market.